Fed Hike Path Set for October Amid Inflation Concerns

The US dollar's path forward is becoming increasingly likely to be influenced by the Federal Reserve's decision-making process, according to TD Securities economists Oscar Munoz and Eli Nir.

The team expects the Fed to hike interest rates two more times, with October being a key milestone, as policymakers have expressed growing concerns about inflation remaining above target. Fedspeak has leaned hawkish in recent weeks, with officials losing confidence in inflation's progress towards its target.

PCE (Personal Consumption Expenditures) inflation is expected to reflect the strong August CPI and PPI reports, with a 0.38% monthly gain (3.8% year-over-year). The market will be paying close attention to the BEA's annual revisions, which may not revise y/y inflation lower as much as markets expect.

The economists also highlight the stable labor market and robust activity data, which they believe can handle more restrictions provided by the Fed. However, it's the evolution of inflation data that will determine the extent and pace of hikes later in the cycle.